I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Thursday, September 9, 2010

Raising only a sign of warning at the moment...

I have mentioned roughly two weeks ago that you should not underestimate weak dollar as it stalled at its 50d moving average:

and then I left for a week on vacation... what happened since then? While I was expecting a sharp drop in dollar index and consequently a rise in equities and commodities, the latter ones in fact put a significant rally, while dollar fell just a fraction of what we got used to recently. Well, you cannot blame for mixing cause and effect relationship. equities and commodities did rally... and at least currencies did not screw my image ))))

anyway, what is next?

well, medium term volatility expressed by Bollinger Bands is falling for most of the markets and feels like September is going to be quiet. Nevertheless there ranges which can be played with. Also, we approach significant resistances foe S&P , copper and oil so for the moment I would just raise a warning sign to the recent rally.50d moving average for dollar index looks to be a good resistance and I would raise a red flag if we move above it.

S&P is approaching 200d moving average and upper BB and while it feels like there is no reason for the market to change short term trend I would get really nervous being long if we stall at this level. No reason to go short yet though, even if I continue to believe we will see much lower levels over the long term:


Chinese government, with it latest move to investigate market manipulation in rubber market is screwing my head and shoulders patter for Shanghai Composite. Also looks to be a boring market for the moment:


Oil has a potential to rally further as rose above most of the moving average and following a reversal day on August 25 the trend upwards might continue further. Again it goes against my bearish view, but I just cannot argue with the market. risk/rewards is still good for a long trade with a stop loss somewhere below moving average congestion yet I would not add to longs in here following my end of august bull case. I think it is time to get a little bit nervous about this market as well:


Copper is showing sings of trend exhaustion. Base metals were the strongest performers among risk assets. Will it lead the way down. This market is dominated by CTA's, so thinking their way, I would start liquidating my long positions, especially if Shanghai fails to to confirm Head and Shoulders pattern:


So at the moment I would only get cautious at the recent rally, but short term down trend  has yet to be confirmed. A series of lower highs in most of the market still suggest longer term down trend....
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